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“Effective OEC Management Control System at China Haier Group,”

Strategic Finance, May 2005, pp. 39-45.

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 International

China
Haier Group
E F F E C T I V E O E C M A N A G E M E N T C O N T R O L AT

THE COMPANY HAS BECOME SUCCESSFUL THROUGH EXCELLENT CUSTOMER SERVICE, PRODUCT
QUALITY, OPERATING EFFICIENCY, INNOVATION, AND SPEED TO MARKET.

B Y T H O M A S W. L I N , C M A

In 1984, Zhang Ruimin took over a nearly bankrupt refrigerator factory in Qingdao, China. In 2003, the

company’s global sales hit $9.7 billion with a growth rate of 70% during the previous 19 years. Today, Haier

Group is recognized as a worldwide brand. On January 31, 2004, the firm ranked 95th after such household

names as Coca-Cola, McDonald’s, and Nokia, which were the top three on the World Brand Laboratory’s list

of the 100 most recognizable brands. Haier was the only Chinese brand on the list.

May 2005 I S T R AT E G I C F I N A N C E 39
 So how did they achieve their success? As one of
China’s fastest-growing companies, Haier Group fits a
1999 Gallup survey profile for a successful company. Cus-
tomer service, product quality, operating efficiency, inno-
vation, and speed to market are among the top seven
factors for success. Haier excels in all these areas.
To achieve success the company developed its corpo-
rate culture, business strategy, and OEC management-
control system, which enforces firm work rules and
discipline. Haier’s Human Resource Management Direc-
tor Wang Yingmin explains the OEC acronym: “O stands
for Overall; E stands for Everyone, Everything, and Every-
day; C stands for Control and Clear. OEC means that
every employee has to accomplish the target work every
day. The OEC management-control system aims at over-
all control of everything that every employee finishes on
his or her job every day, with a 1% increase over what
was done the previous day.”
Why did Haier choose to implement the OEC system?
According to CEO Zhang, “If you observe Chinese peo-
ple’s behaviors at the traffic lights, when the red light is
on, people simply ignore it and cross the street anyway. At
the workplace, Chinese people also tend to ignore rules
and do not pay enough attention to details. We need a
tough management system with fair rewards and penalty
features to help our workers get things done properly.”
OEC works. When I visited Haier’s air conditioner
Figure 1: Three Stages of Strategy Development
40 S T R AT E G I C F I N A N C E I May 2005
“O STANDS FOR OVERALL;
E STANDS FOR EVERYONE,
EVERYTHING, AND EVERYDAY;
C STANDS FOR CONTROL AND
CLEAR.”
manufacturing facility in the Haier High Tech Industrial
Park at Yellow Island in July 2004, the factory floors were
clean, and workers, wearing uniforms with photo ID
badges, operated in an orderly manner at the assembly
lines. Banners featuring quotes such as “A Product with
Defects Is Useless” and “Innovation Is the Soul of Haier
Culture” line the factory walls. One large bulletin board
says, “Every day is a new day; all activities are completed
in the same day by innovations.” The OEC management-
control system implementation has resulted in satisfied
customers, efficient and effective processes, motivated
and prepared employees, sustainable revenue, and profit
growth.
Let’s look at how OEC helped turn the company into
one of the world’s top brands.
BUSINESS STRATEGY
Haier CEO Zhang Ruimin and Presi-
dent Yang Mianmian say the firm
developed three major strategies
over three stages: brand building or
recognition strategy, expansion or
diversification strategy, and global-
ization strategy (see Figure 1).
Called the famous-brand strategy,
the first stage lasted from 1984 to
1991. During this period, the com-
pany created and built Haier-brand
products and set up a quality-
assurance system. In April 1985,
Zhang gathered all employees and
battered the first poor-quality refrig-
erator with a hammer, and then the
employees responsible for these
goods battered 76 defective refriger-
ators. The event woke up the quality
awareness of all employees and
established the concepts of “defec-
tive products are wasters” and “excellent
products are produced by talented employ-
ees.” The thinking shifted from volume as the
priority to quality and brand recognition
being the priorities.
From 1991 to 1998, the second stage fea-
tured an expansion or diversification strategy
within China. Since the firm bases itself on
quality instead of quantity, it decided that if
someone bought a Haier Group refrigerator,
then maybe they would want to buy some-
thing else from the firm. The business was
developed primarily through mergers and
acquisitions to cover all kinds of household
electrical appliances and electronic consumer
goods instead of just one product. At this
time it also focused on building great distrib-
ution channels all over China and improving
product development speed and quality.
Since December 1998, the third stage has
focused on the globalization strategy. Haier
exported its products to Germany first, then
to other European countries, the U.S., South-
east Asian countries, Middle Eastern coun-
tries, and India. In 2000, the firm opened a
$35 million refrigerator factory in Camden,
S.C., and started selling products through
Wal-Mart and many other national and
regional chains. In 2002, Haier opened its
American headquarters in New York City.
The firm’s international promotion frame-
work encompasses global networks for
design, production, distribution, and after-
sales services. It established 18 design insti-
tutes, 10 industrial complexes, 22 overseas
production factories, and 58,800 sales agents
worldwide. Haier sells its products in 12 out
of 15 European chain supermarkets and 10 of
America’s chain stores. And it has design,
production, and sales facilities in the United
States and some European countries with
local employees primarily running them.
None of the employees at its New York head-
quarters is Chinese.
Two other key business strategies at Haier
relate to winning over consumers: speed and
differentiation. Speed means to satisfy the
consumer’s needs as quickly as possible; dif-
ferentiation means to introduce brand-new
3E Card Evaluation Criteria
(Note: U.S. $1 = 8.27Yuans)
The 3E cards feature seven criteria items with 30 checkpoints.
Employees complete a 3E card every day, which a supervisor then
reviews. Beyond the seven criteria there are additional sections
on the card relating to penalties and rewards as well as inspec-
tions. Here are examples from each of the seven OEC items.
PRODUCTION PLAN
If less-than-plan production occurs because of external factors,
production plan should be achieved by nonpaid overtime.
QUALITY
Daily defective product costs should be fined according to the
defective product prices announced by the Quality Inspection
department.
TECHNOLOGY LEVEL AND PRODUCTION DISCIPLINE
Employees who fail to follow the technical requirements in produc-
tion should be fined ¥20.
EQUIPMENT
Employees who violate equipment operation procedures should be
fined ¥50.
M AT E R I A L
Employees who produce defective products should be fined an
amount of up to 10% of the material price.
LABOR DISCIPLINE
Employees who are late for work should be fined ¥2; those who
leave early from work should be fined the daily wage.
PRODUCTION SAFETY
Employees who operate without knowledge of safety operation
rules and procedures should be fined ¥10.
O T H E R A W A R D S A N D P E N A LT I E S
This section will handle actions not mentioned above.
ENDORSEMENT
Additional explanations from the operators or inspectors will be
recorded in this section.
INSPECTION AND REVIEW
Inspectors (team chiefs) are required to schedule inspections of
the 3E card and give comments on evaluation and endorsement
results. Reviewers are required to schedule reviews of the 3E
card and release a review opinion. Employees’ wages will be
determined according to review results.
May 2005 I S T R AT E G I C F I N A N C E 41
 Table 1: Division _________Fiscal Year Guidelines and Goals
GUIDELINES X-1 YEAR: X YEAR: X+1 YEAR:

GOALS CONTRAST ITEMS CURRENT HIGHEST LEVEL FACTS OF _____ DIVISION

HOME AND ABROAD

LEVEL COMPANY X-1 YEAR X YEAR INCREASED BY % PLAN OF X+1 YEAR INCREASED BY %

Capacity Output (00,000 units)

Variety
Financial Sales ($000,000,000)
Performance Profit ($000,000,000)
Productivity Productivity
(Units per person, year)
Profit per person
($10,000 per person, year)
Income per person
Management Quality
Institutional Reform
Infrastructure Management
Market New Products
Market Star Products
Products Cash Cow Products
Dog Products
Target Market
Market Position
Development Science and Technology
New Projects
Fields or Business Lines
Prepared by: Verified by: Approved by:

products or products with features to meet different
needs. For example, the firm’s U.S. president requested
that the Haier headquarters design a new refrigerator that
has pullout drawers in the freezer chest for the U.S. mar-
ket, and in 17 hours a micro-freezer prototype was built.
This really exemplifies the firm’s speed strategy. Another
example of the firm’s differentiation in action: One
employee discovered through visiting rural customers in
the western part of China that they frequently used their
washing machines not only to launder clothes but to also
clean vegetables. Later, the firm marketed the machines as
versatile enough to wash both clothing and vegetables for
China’s rural areas.
Haier differs from other appliance companies in that it
will build products to order and it doesn’t compete on
price. Its philosophy is: “Customer is the king for every
Haier salesperson.” All employees learn that they have to
give customers what they want. For example, if a cus-
tomer buys a refrigerator, an employee goes to the cus-
42 S T R AT E G I C F I N A N C E I May 2005
tomer’s home to set it up for them.
HOW DOES OEC MANAGEMENT WORK AT HAIER?
For constant business growth, a company needs to con-
tinuously raise its goals and quality through innovation.
That’s where OEC comes in. Based on market competi-
tion, OEC management strives to continuously raise the
firm’s goals and improve management skills to achieve a
sustainable competitive advantage. Every employee at
Haier attends one month of corporate culture and OEC
management training before being put to work.
Haier’s OEC management-control system and enter-
prise culture have the following characteristics:
◆ Focus on and understand customer value, product
quality, operating efficiency, innovation, and speed to
market.
◆ Commit top management and leadership to creating
a “new way of management” and a performance culture.
◆ Involve management and employees in creating the
 Table 2: Divisional Management Account

_____________Division ________ Fiscal Year

GUIDELINES
ADVANCED GOALS

(1) NUMBER (2) GOALS (3) TARGET VALUES (4) EXISTING (5) ACTION PROGRAMS
PROBLEMS

(1) (2) (3) (4) (a) Through the daily clearance control procedure, we should integrate
daily clearance into worker’s daily life to ensure goal realization: task
5 Management ◆ Reforms of ◆ Lower error-
assignment, daily worksheet, error correction, result review, and salary
daily clearance correction rate of
compensation.
management to daily clearance.
(b) Achieve goals of: daily plan control; scheduled work achievement
achieve group’s
◆ Problems in inspection timetable; error correction controlled by daily clearance;
A level.
on-spot manage- 100% item controlled rate; 100% “A level” goal attainment; larger than
◆ Raise team ment and low 95% “B level” goal attainment.
management skill standards. (c) Use the industrial engineering method to streamline on-site
level. management model.
(d) Cultivate, educate, and select future higher-level managers and
◆ Benchmark
executive elites.
goals to achieve
(e) Set up a bulletin board to announce monthly job rotation and pro-
the competitive
motion results.
advantage.
(f) Prepare a compensation reform plan to solve unfairness in
compensation.
(g) Strengthen factory safety system to ensure zero occurrence rates in
major accidents and less than 0.3% minor accidents.
Note: This table skips 1 to 4 and shows only No. 5 as an example. (h) Train and establish six to eight honor teams.
(i) Train and establish three self-management teams and 10 exam-
waiver teams.

(7) DEPARTMENTS RESPONSIBLE ✪ RESPONSIBLE ★ ASSISTANT x SUPPORTING

(6) HR FINANCE PLANNING MATERIAL QUALITY EQUIPMENT INSPECTION AFTER-SALE FACTORY I FACTORY II FACTORY III (8) STANDARD (9) VERIFICATION (10) REVIEW
PERIOD SERVICE MATERIALS METHODS
(a) ✪ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ New Mode Monthly
Aug Standard Material Review
(b) ★ ✪ ★ Q19509A Exam Sheet Monthly
All Evaluation Report
Year Result and Review
(c) ✪ ★ ★ ★ : : Monthly
May Plan Review
(d) ✪ ★ New Operation Quarterly
All Standard Evaluation Plan Review
Year Result
(e) ✪ : Announce Result Monthly
March Review
(f) ✪ ★ : Evaluation :
March Result
(g) ✪ ★ ★ ★ ★ ★ 954401- Not Daily Report,
All 954405 Exceeding Monthly
Year Standard: Review
Announce
(h) ✪ x x x ★ x x ★ ★ ★ ★ : Evaluation Monthly
Sept. Result Plan Review
(i) ★ ★ ★ ✪ ★ ★ ★ ★ 929501- Standard Monthly
Oct. 929504 Attainment Report and
Result Review

Prepared by: Approved by:

May 2005 I S T R AT E G I C F I N A N C E 43
 OEC management-control system. Allow them to become
familiar with OEC so they feel included and share in
ownership of the system.
◆ Educate management and employees. Use seminars
and weekly company newsletters to explain the firm’s
strategy, customer value, OEC management, and the idea
of every employee being a strategic business unit (SBU)
to enable them to understand the concept and appreciate
the benefits. (SBU means that each employee is a profit
EACH PIECE OF GLASS IN A
PARTICULAR BUILDING IS
ASSOCIATED WITH AN
EMPLOYEE WHO MUST TAKE
CARE OF IT.
center with the responsibility to make a profit. Each
employee generates his or her revenue by providing the
best service to the employee in the next step downstream
and incurs expense or cost by receiving service from the
employee in the previous step upstream and resources
from various supporting departments.)
◆ Create desired incentives, and reassure employees
that they will be properly evaluated in accordance with
their performance.
The OEC management-control system has three sub-
systems: target setting; control, checking, and clearance;
and incentive mechanism. Here’s how these subsystems
work.
Target Setting
Every December, Haier headquarters sets the next year’s
guidelines and goals for each division by considering past
performance, market demand forecast, group long-term
goals, and each division’s input on specific market-
development needs (see Table 1).
Each division submits a divisional action program
form with respect to its annual guidelines and goals. Also
called the divisional management account, it includes
specific annual goals, specific targets, and action pro-
grams, deadlines, responsible divisions, quality criteria,
evaluation method, and frequency (see Table 2).
A department management account is the same as the
44 S T R AT E G I C F I N A N C E I May 2005
divisional action program. Before the 26th day of each
month, every department head submits an OEC monthly
control general ledger to his or her superior for approval.
It includes a list of items, target value, last month’s value,
expected evaluation result, last month’s error-correction
numbers, this month’s error-correction numbers, respon-
sible persons, work hours, and daily clearance control
evaluation summary.
Every employee also completes a daily activity control
clearing account called an employee management
account. It consists of task items, evaluation criteria
(benchmark, past-period performance, and this-period
goal), values, name of the responsible employee, daily
actual results, evaluation results, actual compensation,
and reviewer. To track performance, each job is assigned
to a specific employee along with a clear delineation of
the job’s supervising manager, the responsible employee,
the employee’s partner, and the quality-check person.
For example, each piece of glass in a particular building
is associated with an employee who must take care
of it.
Control, Checking, and Clearance: the OEC Daily
Clearing Routine
The second subsystem—control, checking, and
clearance—includes the OEC daily clearing routine,
which involves a nine-step list of procedures:
1. Each team supervisor gives a daily briefing to work-
ers before they start their work.
2. Production workers conduct their activities by fol-
lowing the seven OEC criteria to check and control: pro-
duction quantity, quality, material consumption,
technology level, equipment maintenance and condition,
production safety and workplace condition, and labor
discipline. For other workers, the criteria consist of activi-
ty items and specific targets.
3. Supervisors conduct on-site inspection tours every
two hours, detect and solve problems, and complete the
production site OEC form with the seven OEC criteria
items.
4. At the end of the day, all workers conduct a self-
check of their own work with the OEC criteria, fill out
their 3E (Everyone, Everything, and Everyday) cards with
seven OEC criteria items, and submit them to their
supervisors. The OEC evaluation criteria include 30 items
(see “3E Card Evaluation Criteria” sidebar on p. 41 for
examples as well as fines if employees don’t uphold the
criteria related to the seven OEC areas).
5. Each supervisor examines the 3E cards, corrects

THE EMPLOYEES WHO ARE
ACKNOWLEDGED AS THE BEST
WORKERS FOR THREE
CONSECUTIVE DAYS HAVE THE
HONOR OF TELLING THEIR
EXPERIENCES TO FELLOW
WORKERS.
errors, gives a comprehensive evaluation, and submits the
evaluation results to the work area manager. Evaluation
results are graded as A, B, and C. If an employee achieves
an A, ¥5 are added to that employee’s daily compensa-
tion; if an employee receives a C, it’s minus ¥5.
6. Each work area manager checks the sample 3E
cards then fills out his or her own 3E card and submits it
to the factory director.
7. Each factory director reviews the 3E cards and
records the results in the factory OEC account. He or she
then files a daily progress report to the Deputy Division
General Manager regarding problems that have been
solved, problems that haven’t been solved, and suggested
solutions to unsolved problems.
8. The Deputy Division General Manager reviews
daily progress reports and suggested solutions and pro-
vides feedback before reporting to the Division General
Manager.
9. If necessary, all production and supporting
department heads get together to discuss and analyze
problems found through the OEC process and work
together to suggest corrections, improvement, and pre-
vention that are needed.
Incentive Mechanism
Haier’s third subsystem is the incentive mechanism, and
its incentive policies are openness and fairness. The com-
pany adopts a point system for production workers using
the 3E card, and if an employee earns more points, he or
she makes a higher wage and bonus (this way, both man-
agement and employee know the daily wage and why).
The firm also uses quality-check coupons to provide an
additional incentive mechanism. Each employee has a
quality-check coupon booklet with red and yellow
View publication stats
coupons for rewards and penalties. The booklet lists all
quality problems the firm has detected and provides
guidelines for checking each defect. If an employee failed
to self-check a quality problem that was later found by
his or her team member during a cross-check or by the
superior during a managerial check, the employee will
lose a red coupon and receive a yellow coupon that will
be counted against that day’s wage and bonus.
As further motivation, each employee receives a daily
grade for actual performance and progress toward achiev-
ing his or her target. Daily evaluation results are shown to
workers the next day on the bulletin boards in the facto-
ry. The employees who are acknowledged as the best
workers for three consecutive days have the honor of
telling their experiences to fellow workers. The employees
who become the best workers most frequently in one
month are considered the best workers of the month.
They have more opportunities to attend job training and
more social benefits, while employees who become the
worst workers most frequently in one month are demoted
to probation workers.
Finally, the firm has an open competitive bidding sys-
tem for job placement. When there’s a job opening within
the group, employees who have reached the qualified skill
level through internal training seminars or on-the-job
training can bid for that job. Management then makes
the final decision and selects the best candidate based on
the submitted bids.
SUSTAINABILITY
From a nearly bankrupt company to a recognized world-
wide brand, Haier has come a long way. Through making
employees responsible for meeting OEC criteria, Haier
will continue to excel and achieve its short-term goal of
becoming one of the world’s top three white-goods man-
ufacturers. In this current competitive market economy,
many companies have much to learn from Haier’s culture
and OEC management-control system. ■
Thomas W. Lin, CMA, Ph.D., is a professor of accounting
and the Leventhal International Faculty Fellow in the Mar-
shall School of Business at the University of Southern Cali-
fornia in Los Angeles. You can reach him at (213) 740-4851
or wtlin@marshall.usc.edu.
The author acknowledges the financial support provided by
the IMA Foundation for Applied Research and would like to
thank Haier University President Zou Xiwen for providing
the tables, which were originally in Chinese.
May 2005 I S T R AT E G I C F I N A N C E 45